[ 3rd Quarter of fiscal 2023 Performance Briefing ]Consolidated Results for 3Q of FY March 2023
Consolidated Full Year Projections for FY March 2023

Mr. Tetsuji Yamanishi
Executive Vice President

Hello, I’m Tetsuji Yamanishi, Executive Vice President of TDK. Thank you for taking the time to attend TDK’s performance briefing for the first nine months of the fiscal year ending March 2023. I will be presenting an overview of our consolidated results.

Key points concerning earnings for 3Q of FY March 2023

First, let’s take a look at the key points concerning the earnings for the first nine months of the fiscal year ending March 2023. Continued hikes in the prices of energy and certain materials due to heightened geopolitical risks associated with the protraction of Russia’s invasion of Ukraine, as well as policy rate hikes in the United States and Europe, intensified fears of stagnation of the global economy. Although final demand has remained sluggish in the electronics market as a result, net sales and operating profit increased by 17.5% and 14.5%, respectively, on a year on year basis on the back of EV-related demand such as demand for components related to xEVs. Reflecting brisk earnings for the third quarter on top of strong half-yearly results, both net sales and operating profit reached record highs on a nine-month basis.
In the ICT market, sales of HDD-related components declined significantly as demand related to PCs and tablets, which had been brisk amid the COVID-19 pandemic, dropped further and demand related to data centers remained sluggish. While smartphone production has also remained low, sales of Rechargeable Batteries and Sensors expanded for new models launched by TDK’s major customers.
In the automobile market, while supply chain constraints such as semiconductor shortage persisted, overall demand recovered moderately, and component demand remained brisk thanks to an increase in the xEV ratio and the spread of ADAS. As a result, sales of Passive Components and Sensors increased.
There have been global concerns over energy supply and soaring energy prices reflecting heightened geopolitical risks. Against such background, sales of Medium Capacity Rechargeable Batteries and Power Supplies for industrial equipment expanded as demand related to renewable energy, energy-saving equipment, and residential energy storage systems continued to increase.

Consolidated results through 3Q of FY March 2023

Next, I would like to present an overview of our results. First, as for the results for the first nine months, there was an increase of about 251.4 billion yen in net sales and an increase of about 60.9 billion yen in operating profit due to exchange rate fluctuations against the U.S. dollar and other currencies. Including this impact, net sales were 1,709.0 billion yen, an increase of 315.1 billion yen, or 22.6%, year on year. Operating profit was 188.7 billion yen, an increase of 47.4 billion yen, or 33.5%, year on year. Profit before tax was 188.1 billion yen, and net profit was 136.9 billion yen.
TDK posted new record-highs for all items, ranging from net sales to net profit, on a nine-month basis. Earnings per share were 361.06 yen.
With regard to exchange rate sensitivity, we maintain our estimate that a change of 1 yen against the U.S. dollar will affect operating profit by about 2.0 billion yen a year, while a 1-yen change against the euro will have an impact of about 0.6 billion yen a year.

Consolidated results for 3Q of FY March 2023

Second, as for the results for the third quarter, there was an increase of about 87.3 billion yen in net sales and an increase of about 24.0 billion yen in operating profit due to exchange rate fluctuations against the U.S. dollar and other currencies. Including this impact, net sales were 587.0 billion yen, an increase of 87.3 billion yen, or 17.5%, year on year. Operating profit was 68.4 billion yen, an increase of 8.7 billion yen, or 14.5%, year on year. Profit before tax was 68.2 billion yen, and net profit was 49.9 billion yen. Earnings per share were 131.64 yen.

3Q results - Passive Components segment

Next, I would like to explain our business segment performance for the third quarter.
Net sales in the Passive Components segment were 144.6 billion yen, an increase of 11.2% year on year. Component demand from the automotive market, especially for xEVs and ADAS, has remained brisk. Demand from the industrial equipment market has also been firm, particularly for renewable energy and production equipment. As a result, sales and profit of Capacitors and Inductive Devices increased year on year. On the other hand, sales and profit of High-Frequency Components, which have a high ratio of smartphone-related sales, dropped considerably from the previous fiscal year reflecting a decline in demand for smartphones. Profit of Piezoelectric Material Products and Circuit Protection Components decreased year on year due to a decline in the sales volume of products used in smartphones and home appliances.

3Q results - Sensor Application Products segment

Net sales in the Sensor Application Products segment amounted to 45.6 billion yen, a significant increase of 26.3% on a year-on-year basis. Operating profit increased 1.8 times year on year, reflecting the substantially increased sales. In addition, the operating profit margin reached the double-digit level for the first time.
Sales of Temperature and Pressure Sensors increased to the automotive market. In Magnetic Sensors, sales of Hall Sensors increased to the automotive market as did sales of new products for smartphone applications. Sales of TMR Sensors to the automotive market remained firm and those for smartphone applications also expanded on the back of increased adoption. As a result, sales of Magnetic Sensors on the whole increased considerably on a year-on-year basis. Profit has also grown significantly as a result of the improvement in profitability.
In MEMS Sensors, while sales to the ICT market, which saw sluggish demand, decreased, sales to the automotive market increased. In addition, sales for wearables and game machine applications grew steadily. Consequently, sales of MEMS Sensors increased year on year.

3Q results - Magnetic Application Products segment

In the Magnetic Application Products segment, net sales decreased 25.8% year on year to 47.5 billion yen, and an operating loss of 13.9 billion yen was posted.
In HDD Heads and HDD Suspension Assemblies, HDD demand for PCs declined. In terms of demand related to Nearline HDD Heads, investment in data centers decreased due to the effect of economic slowdown among other factors. As a result of HDD inventory adjustment, total demand for HDDs declined further from the second quarter, recording a year-on-year decrease of over 40%. Consequently, sales volume of HDD Heads and HDD Suspension Assemblies more than halved from the previous fiscal year, resulting in a significant year-on-year decline in sales and the posting of a loss. Based on the assumption that total demand for HDDs will take some time to recover, restructuring of HDD Heads was carried out during the third quarter, which resulted in the recording of expenses amounting to about 1.0 billion yen.
While sales of Magnets increased year on year reflecting a rise in sales related to xEVs, profit decreased year on year due to the effect of soaring material prices and the delay in efforts to improve productivity.

3Q results - Energy Application Products segment

In the Energy Application Products segment, net sales increased 29.4% year on year to 331.4 billion yen and operating profit surged 53.4% year on year to 59.8 billion yen.
In Rechargeable Batteries, while sales volume for mobile applications, such as Chinese smartphones, tablets, and notebook PCs, decreased, sales related to new smartphone models increased. In addition, sales of Medium Capacity Rechargeable Batteries steadily expanded, mainly for residential energy storage systems and other applications.
Consequently, sales of Rechargeable Batteries increased year on year on an actual basis excluding the effect of fluctuations in foreign exchange rates. Operating profit increased year on year on an actual basis excluding the effect of fluctuations in foreign exchange rates as a result of the improvement in the product mix as well as our efforts to reduce overall costs including SG&A expenses and to increase the profitability of Medium Capacity Rechargeable Batteries, despite the negative impact on profit from the decline in sales volume of Small Capacity Rechargeable Batteries.
In Power Supplies for industrial equipment, demand related to industrial equipment, such as semiconductor manufacturing equipment, as well as medical equipment applications remained robust, resulting in year-on-year increases in both sales and profit.

Quarterly results by segment

Now, I will explain some of the factors behind the changes in segment net sales and operating profit from the second quarter of the fiscal year ending March 2023.
First, in the Passive Components segment, net sales decreased by 8.0 billion yen, or 5.3%, from the second quarter, and operating profit dropped by 3.6 billion yen, or 12.1%, from the second quarter. Sales decreased for all businesses from the second quarter as a result of a decline in sales to the industrial equipment market, for home appliance applications, and to distributors, on top of the decrease in sales to the ICT market, mainly for smartphone applications. While profit of Capacitors, which saw robust sales related to xEVs, increased from the second quarter, profit of other businesses decreased from the second quarter due to the effect of the decline in sales.
In the Sensor Application Products segment, while net sales remained virtually flat from the second quarter, operating profit increased by 1.2 billion yen, or 27.5%, from the second quarter. Sales and profit of Temperature and Pressure Sensors decreased from the second quarter, reflecting a decline in sales to the automotive market due to seasonal factors such as the Christmas holiday, as well as a drop in sales related to home appliances. In Magnetic Sensors, sales and profit of both TMR Sensors and Hall Sensors increased from the second quarter as sales related to new models launched by our major customers peaked during the third quarter. In MEMS Sensors, both sales and profit decreased from the second quarter due to a decline in sales of Motion Sensors for smartphone applications in China as well as a drop in sales of Microphones.
In the Magnetic Application Products segment, net sales decreased by 7.2 billion yen, or 13.2%, from the second quarter, and operating profit decreased by 12.1 billion yen from the second quarter. Net sales dropped considerably from the second quarter as the sales volume of HDD Heads decreased 29% and that of HDD Suspension Assemblies decreased 17% due mainly to a further decline in total demand for Nearline HDD Heads. The segment posted a loss reflecting the significant decline in profit driven by a loss from operating activities. As a result of the restructuring of back-end processes for HDD Heads in light of changing demand trends, expenses amounting to about 1.0 billion yen were recorded in the third quarter. Sales of Magnets increased year on year reflecting a rise in sales related to xEVs.
In the Energy Application Products segment, net sales decreased by 10.9 billion yen, or 3.2%, from the second quarter, while operating profit increased by 6.3 billion yen, or 11.7%, from the second quarter. Sales volume of Rechargeable Batteries to the ICT market increased reflecting an increase in sales related to the launch of new models by our major customers. On the other hand, sales decreased for mobile applications, such as PCs and tablets, resulting in a decline in sales of Small Capacity Rechargeable Batteries to the ICT market on the whole. Sales of Medium Capacity Rechargeable Batteries remained virtually unchanged from the second quarter, mainly for residential energy storage systems and other applications. As a result, sales of Rechargeable Batteries on the whole decreased from the second quarter. Operating profit increased from the second quarter as a result of our efforts to reduce overall costs including SG&A expenses as well as to increase the profitability of Medium Capacity Rechargeable Batteries, despite the negative effect of the discounts on selling prices due to a decline in material prices. Sales of Power Supplies for industrial equipment increased from the second quarter, resulting in an improvement in profitability.

Breakdown of operating profit changes

Next is a breakdown of changes in operating profit. Let’s take a look at the main factors behind the 8.7 billion yen increase in operating profit. First, operating profit decreased sharply by 28.6 billion yen due to changes in sales, reflecting a decline in sales volume of HDD Heads, HDD Suspension Assemblies and Rechargeable Batteries which had been significantly affected by a drop in demand from the ICT market. On the other hand, operating profit was boosted by 24.0 billion yen thanks to the positive effect of the yen’s depreciation, which offset the negative impact on profit from the changes in sales to a certain extent. In addition, operating profit improved by about 15.0 billion yen from the previous fiscal year as a result of the promotion of rationalization and cost reduction efforts mainly for Rechargeable Batteries and Passive Components, as well as the benefits from restructuring and streamlining of SG&A expenses. Consequently, operating profit increased on a year-on-year basis. Meanwhile, in light of the changing demand environment surrounding HDD Heads, restructuring was carried out during the third quarter, which resulted in the recording of expenses amounting to about 1.0 billion yen.

FY March 2023 full year / dividend projections

Finally, I would like to discuss our projections for consolidated financial results for the fiscal year ending March 2023.
Continued hikes in the prices of energy and certain materials due to heightened geopolitical risks, as well as policy rate hikes in the United States and Europe, intensified fears of stagnation of the global economy. Under these circumstances, we expect that demand for and production volume of major devices related to TDK’s businesses will be lower than our previous projections.
In light of our earnings for the first nine months of the current fiscal year as well as the current order status amid such demand environment, our projections have been revised downward from the previous projections as follows: net sales of 2,170.0 billion yen; operating profit of 185.0 billion yen; profit before tax of 185.0 billion yen; and net profit of 132.0 billion yen. Given increasing downward pressure on final demand, TDK will implement measures to improve asset efficiency and is expected to post about 20.0 billion yen as one-time expenses including restructuring costs in the fourth quarter of the fiscal year ending March 2023. Meanwhile, on the assumption of a business environment in which it will be hard to expect sales volume to expand, we have been making efforts to improve profitability by increasing the efficiency of fixed costs and to enhance cash flows through inventory reduction among others. As a result, free cash flows at the end of the current fiscal year are expected to exceed the levels based on our initial projections.
Our exchange rate assumptions are 130 yen against the U.S. dollar and 137 yen against the euro for the fourth quarter, and 135 yen against the U.S. dollar and 140 yen against the euro for the fiscal year ending March 2023. There have been no changes in the dividend projections announced at the beginning of the current fiscal year. We expect the year-end dividend to be 53 yen and annual dividend to be 106 yen. There are no revisions to the projections for capital expenditures, depreciation and amortization, and research and development expenses from the previous announcement.
This concludes my presentation. Thank you very much for your attention.